Understanding Mortgages for Self-Employed Individuals: Breaking the Myths

There’s a misconception about self-employment and mortgage availability (Picture: Getty Images)

Many people in the UK believe that self-employment severely limits their chances of obtaining a mortgage. However, a recent survey by mortgage adviser Alexander Hall reveals that this is far from the truth. In fact, over half of those surveyed were unaware that lenders typically require only two years of certified accounts or HMRC tax calculations for self-employed applicants, with some even considering applications based on just one year’s documentation.

The Evolution of Mortgage Approval for Self-Employed Individuals

Historically, self-employed individuals faced barriers due to perceived income volatility. Unfortunately, these preconceived notions can discourage aspiring homeowners from seeking to buy property. Fortunately, recent research indicates a shift in the mortgage landscape, with lenders recognizing the diverse income profiles of self-employed individuals.

According to Shawbrook’s latest Home-A-Loan report, the rejection rate for self-employed mortgage applicants has dropped impressively from 45% last year to 24% this year.

How Do Lenders Assess Self-Employed Applicants?

Contrary to common fears, mortgage lenders have adapted their processes to better accommodate self-employed individuals. Here are some common requirements they have for approving mortgages:

• Certified or Audited Accounts: Typically, lenders require two years of documented income, although one year may suffice in some cases.
• HMRC Self-Assessment Tax Calculations: These provide the necessary financial overview.
• Bank Statements: Applicants may need to submit bank statements reflecting their income and expenditure.

Lenders often employ an income averaging approach over the documented years. For instance, if an applicant’s income fluctuates, higher earnings in a given year can bolster their application, while declining income may complicate matters.

According to Experian, lenders may consider an applicant’s lowest earning year as a baseline if the income is highly variable. Additionally, supplementary documents, such as confirmation of ongoing contracts or invoice histories, can further enhance an application.

Diverse Mortgage Products for Self-Employed Borrowers

The mortgage market is increasingly welcoming to self-employed borrowers. Here’s what to expect:

• Multiple Income Streams: Applicants with a combination of income sources—like part-time employment along with self-employment—can often amalgamate these for a more favorable assessment.

• Major Banks & Specialist Lenders: High-street banks and specialized lenders now offer tailored mortgage products that accommodate self-employment realities.

• Flexible Underwriting: Many lenders have moved beyond the standard rigid income multiples to incorporate bespoke affordability assessments.

• Minimal Documentation Requirements: Some lenders may only need one year’s accounts or tax returns, particularly if other financial indicators, like credit history and deposit size, are favorable.

Challenges Self-Employed Borrowers Face

Despite significant progress in the mortgage industry, challenges remain. Shawbrook reports that nearly 34% of self-employed applicants are still rejected due to insufficient credit scores, while 30% are deemed too uncertain financially. This cautious lender approach contrasts sharply with the findings that 79% of self-employed applicants have never missed a payment.

Common Challenges Include:

• Credit History: Adverse credit issues can hinder approval. However, some specialist lenders may still consider recent adverse credit if fully disclosed.
• Documentation Preparations: Collecting and certifying financial evidence can be overwhelming and requires meticulous organization.
• Income Volatility: Fluctuations in income may limit borrowing capacity, making it vital for applicants to present stable income streams where possible.
• Higher Deposits & Rates: Some lenders may require larger deposits or offer slightly higher interest rates to compensate for perceived risks.

Market Trends and Future Insights

The mortgage market is continually evolving, especially with the rise of gig economy workers and freelancers—a trend accelerated by events like the COVID-19 pandemic. According to the Together Residential Property Market Report, the self-employed mortgage sector is projected to grow by 67% over the next four years, reaching approximately £34.8 billion by 2029.

Despite this growth, about 22% of applicants still face rejection categorized as ‘non-standard’ due to their self-employed status. John Barker, CEO of personal finance at Together, emphasized the need for a more inclusive financial services approach, urging lenders to consider the complete financial picture beyond just credit scores or loan-to-income ratios.

In conclusion, the outdated belief that self-employed individuals are locked out of mortgage possibilities in the UK is fading. With more flexible lending criteria, customized mortgage products, and knowledgeable advisory services, self-employment is no longer a barrier to home ownership.

Prospective buyers should leverage these industry advances, prepare their financial documentation carefully, and seek advice from experienced professionals to maximize their chances of securing a mortgage.

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